CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTERDEPARTMENTAL CORRESPONDENCE
Date: June 192013
To: Retirement Board Members FrOrtj;; Sangeeta Bhatia Retirement Plan Manager
Subject: Board Agenda Item No.9: Discussion of Real Return Asset Class Policy Benchmark; and Possible Action (June 26, 2013, Special Retirement Board Meeting)
Recommendation
That the Retirement Board:
1. Adopt the proposal to amend the Retirement Plan's (Plan) Real Return asset class policy benchmark from Treasury Bills (T-Bills) + 3% to Consumer Price Index (CPI) + 3%, effective July 1, 2013; and,
2. Authorize the Retirement Plan Manager to amend the Investment Policy Statement to reflect the change in the Real Return asset class benchmark from T-Bills + 3% to CPI + 3%, effective July 2,2013.
Summary
The purpose of the Real Return portfolio is to diversify equity risk, provide a hedge against inflation, and produce relatively stable returns with principal protection for the Plan's overall portfolio. Currently, the performance objective of the Real Return portfolio is to generate a total return, net of fees, that exceeds the T-Bills + 3% over a rolling five year period. Initially, the Real Return asset class only had Absolute Return managers, Aetos and PAAMCO. In 2010, the Retirement Board hired Western Asset Management Company, to manage a Global Inllation Linked Securities mandate which was added to the Real Return asset class.
At the Regular Board meeting held on January 25, 2012, the Retirement Board adopted a new allocation structure for the Real Return asset class proposed by Pension Consulting Alliance, Inc., (PCA) (Resolution No. 12-53). The newly adopted Real Return structure includes a new increase in exposure to the Absolute Return allocation and separate account structure, with two new complementary strategies (Convergent and Divergent), a new Commodities mandate, and a new Timber mandate (Resolution No. 12-53).
9.1 As a result of the restructuring, and because the Plan's Commodities mandate is expected to fund in the near future, PCA is recommending, and staff concurs, changing the Real Return asset class policy benchmark to the CPI +3%. PCA believes the CPI + 3% is more renective of the purpose of the Real Return asset class, which is primarily to heqge the Plan assets against inflation and produce relatively stable returns.
The Real Return component of the Plan's Policy Benchmark, which is used to measure the performance of the Plan's overall portfolio, will also change from T-Bills + 3% to CPI + 3%. The proposed change to the Real Return asset class policy benchmark will be effective July 1, 2013, and reflected in the Investment Policy Statement accordingly.
The following documents are attached: • Resolution No. 13-90 • Correspondence from PCA • Resolution No. 12-53 (approved 1-25-2012) ..4tA.JX/~ 6r Jeremy Wolfson Chief Investment Officer
SB:JW:SV:AL
9.2 RESOLUTION NO. 13-90
RESOLUTION TO AMEND REAL RETURN ASSET CLASS POLICY BENCHMARK
WHEREAS, the purpose of the real return portfolio is to diversify equity risk, provide a hedge against inflation, produce relatively stable returns with principal protection, and generate a total return, net of fees, that exceeds Treasury Bills (T-Bills) + 3% over a rolling five-year period; and
WHEREAS, at the Regular Retirement Board meeting held on January 25, 2012, the Retirement Board adopted a new allocation structure proposed by Pension Consulting Alliance, Inc., (PCA); and
WHEREAS, the new real return class now includes an increase in exposure to the Absolute Return allocation, with Convergent and Divergent strategies, a Commodities mandate, and a Timber mandate (Resolution No. 12-53); and
WHEREAS, as a result of the new class structure, and because the Plan's Commodities mandate is expected to fund in the near future, PCA recommends changing the Real Return asset class benchmark to the Consumer Price Index (CPI) + 3%; and
WHEREAS, PCA believes that the benchmark of CPI + 3% is more reflective of the purpose of the Real Return asset class; and
WHEREAS, the Real Return component of the Plan's Policy Benchmark, which is used to measure the performance of the Plan's overall portfolio, will also accordingly change from T-Bills + 3% to CPI + 3%; and
WHEREAS, the proposed amendment to the Real Return asset class policy benchmark will be effective July 1, 2013.
NOW, THEREFORE, BE IT RESOLVED, the Retirement Board hereby authorizes the Retirement Plan Manager to amend the Investment Policy to reflect the change in the Real Return asset class benchmark from T-Bills + 3% to CPI + 3%, effective July 1, 2013.
I HEREBY CERTIFY, the foregoing is a full, true, and correct copy of a Resolution adopted by the Retirement Board of Administration [created by Section 11 02(b) of the Los Angeles City Charter] at its Special meeting held on June 26, 2013. ~~~ Sangeeta Bhatia Retirement Plan Manager
9.3 Date: June 26, 2013
To: Water & Power Employees' Retirement Plan (WPERP)
From: Pension Consulting Alliance, Inc. (PCA) cc: Neil Rue, CFA - PCA Kay Ceserani - PCA ~ David Sancewich - PCA Colin Bebee - PCA
RE: Recommendation to Adjust the Real Return Asset Class Benchmark
Summary and Discussion
In February 2007, WPERP began funding the Real Return asset class with the initial use of Hedge Fund of Funds, which utilized a TBills+3% benchmark. However, as the asset class has evolved with the introduction of Global TIPS and the pending funding of commodities, the asset class policy benchmark needs to better reflect the class' risk profile. As a result of the 2011/2012 Real Return asset class review the Board adopted and approved, CPI+3% as the long- term asset class target. PCA recommends that the Board approve the implementation of the CPI+3% benchmark effective 7/1/2013.
Given the current overweight to TIPS, outperformance versus the current policy benchmark becomes difficult as TIPS are designed to match, not exceed inflation. The inclusion of Commodities and Timber, as well the enhancement to the Hedge Fund portfolio in the Real Return class should help enhance risk-adjusted returns over various market cycles. Given the evolution of the asset class, PCA believes the new benchmark better reflects the inflation orientation of the WPERP account.
9.4 COpy~ RESOLUTION NO. 12-53
RESOLUTION TO ADOPT THE RESTRUCTURING PLAN FOR THE REAL RETURN ASSET CLASS
WHEREAS, at the Regular Board meeting held on .June 16, 2008, the Retirement Board adopted a new asset allocation that included a Real Return asset class with a weighting of 7% (Resolution No. 8-49); and
WHEREAS, the Retirement Plan's (Plan) Real Return asset class initially included two hedge fund-of-funds manage~: Aetos Alternatives Management, LLC(Aetos) and Pacific Alternative Asset Management Company, LLC (PAAMCO), and later added one global inflation linked securities manager, Western Asset Management Company (WAMCO); and
WHEREAS, PAAMCO was terminated in October 2010 (Resolution No. 11-33); and
WHEREAS, as of December 31, 2011, the Plan's Real Return asset class includes Aetos and WAMCO; and
.WHEREAS, as of December 31, 2011, the market value of the entire real return portfolio, including both the Retirement Fund and Retiree Health Benefits Fund portfolios, was $445 million; and
WHEREAS, at the RegUlar Board meeting on .June 22, 2011, Pension Consulting Alliance (PCA) proposed, and the Retirement Board approved, a revised asset allocation structure reducing the Real Return's allocation from 7% to 6% (Resolution No. 11-96); and
WHEREAS, at the Regular Board meeting on December 14, 2011, PCA proposed the following restructuring options for the Real Return asset class:
Option 1 Keep existinq structure and managers Option 2 a) Increase exposure to existing Absolute Return allocation b) Add new Commodities mand~te c) Add new Timber mandate Option 3 a) Increase exposure to and restructure Absolute Return allocation b) Add new Commodities mandate c) Add new Timber mandate Option 4 a) Increase exposure to and restructure Absolute Return allocation b) Add a new complementary Absolute Return strategy c) Add new Commodities mandate d) Add new Timber mandate ;and
WHEREAS, PCA recommends restructuring the Plan's Real Return asset class in accordance with Option 4.
9.5 COpy NOW, THEREFORE, BE IT RESOLVED, the Retirement Plan Manager is hereby authorized to restructure the Plan's Real Return asset class in accordance with Structural Option 4 as outlined above.
I HEREBY CERTIFY, the foregoing is a full, true, and correct copy of a Resolution adopted by the Retirement Board of Administration [created by Section 1102 (b) of the Los Angeles City Charter] at its special meeting held on January 25, 2012.
9.6